Europe’s banking groups are currently doing well – but are exposed to growing risks. According to the ECB, they are not sufficiently prepared for the consequences of the climate crisis.
The large banking groups in Europe are overall stable and profitable. Still, state banking supervisors are worried. There is a lack of sensible management in many banks. When economic shocks occur, many banks cannot react quickly enough. This became clear when the heads of major bank supervision at the European Central Bank (ECB) presented their annual report in Frankfurt am Main today.
In addition, computer systems often do not run securely. According to the supervisors, risks to the banking business are poorly assessed – especially risks from climate change. A few banks simply don’t have the necessary money.
Uncertain profit situation
For the first time, the profits of major banks are in double-digit percentages of the capital employed, reported the head of European supervision, Andrea Enria. This is an average value for the 109 banking groups supervised by the ECB. These include 22 German companies.
However, low stock market values of banks showed that investors did not believe in long-term good profits. Enria pointed out that with interest rates rising overall, it was easier to make a profit. On the other hand, with higher interest rates, the risk that banks face in their lending business also increases.
What if the price of CO2 rises dramatically?
“Climate and environmental risks are crucial for the economy and the financial sector,” says the official report from the ECB Banking Supervision. What happens to banks that finance old industries with no future prospects? What happens if the CO2 price rises drastically and puts a lot of bank customers under pressure?
Using climate risks as an example, the deputy head of the supervisory board, Frank Elderson, explained his toolbox. The ECB initially alerted banks to climate risks. Supervisory discussions then asked what bank managers were doing to get business risks from climate change under control. According to Elderson, the ECB found: “Too many banks have too much work to do.”
The supervisory authority then carried out a test this March in which banks had to simulate a shock from a sharp rise in the price of CO2. “A number of banks hadn’t done their homework,” Elderson said. The institutes would have to rework it by the end of next year. Managing climate risks is “one of our main supervisory priorities.” Elderson warned: “The physical risks out there are actually greater than previously thought.”
Difficult ones Real estate financing
Andrea Enria warned of losses at banks in real estate financing. Regarding the insolvent Signa Group from Austria (which includes, among other things, the Galeria Karstadt Kaufhof department store chain), he said in general that the banking supervisory authority checks whether loans are correctly valued. When it comes to real estate financing, it is important that the buildings deposited as security actually generate the necessary income and that their sales value is maintained. When debtors get into trouble, banks have to write off collateral for borrowed money or create provisions.
Enria said that in the case of a large real estate group, the supervisory authority can compare: How do banks in different countries rate the industry and the specific debtor? Sometimes different banks would finance the same property and value it differently. Enria indicated that the supervisory authority had urged some banks to be more cautious in their assessment. Enria called the idea that this could have led to Signa’s funding drying up “bizarre.”
Lots of requirements
In 103 of the 109 European banking groups supervised, supervisors resorted to coercive measures and requirements this year. Banks were ordered to correct deficiencies within certain deadlines. The official report shows that a quarter of the institutions affected were prosecuted for poor management and excessive credit risk. One in ten institutes has problems remaining liquid in the event of a crisis. At three banking groups, drastic measures were necessary to ensure liquidity.
Europe’s banking supervisors view shaky computer systems with particular concern. Banks are not allowed to outsource too much to service providers and do not control the technical processes themselves. A stress test of the computer systems is planned for next year.